
💼 Minneapolis
briefcase | invest smarter | Issue #138
Thank you to the 221 new readers over the past week, as well as the Midwest for a much-needed vacation and the most welcoming people I’ve ever met. Speaking of hospitality, you voted last week on the best name for a housing crisis cocktail; here were the results:
🥇Mortgage Mojito Madness (51%)
🥈Bitter Interest Bubbly (14%)
🥉Shaken Market Sour (12%)
So grab yourself🍸 Mortgage Mojito Madness, and let’s talk Minneapolis…
🏡 Housing Trumps Inflation
“There is no more effective way to rein in inflation than to expand the supply of affordable housing and increase housing affordability.”
Last week, we explored the 5 steps to follow to create a housing crisis. This week, we will look a how one city is solving it.
Consumer prices increased at a 3.2% annual pace in July, marking a slight uptick from June’s 3%. Although the deceleration trend is promising given this time last year we were hitting 9% inflation, there’s still one problem: Shelter.
Shelter accounted for a staggering 90% of the latest inflation data, and although moderating alongside the rest of inflation buckets, it is now the largest impediment to the Fed lowering rates.
Here is what inflation looks like when you strip it of shelter:
Not too shabby right?
So, how do you solve for shelter? The central bank thinks continuing to raise rates, which puts upward pressure on sheltery things like rents and mortgages, is the answer. To us, it seems counter-productive.
The Federal Reserve is raising interest rates like someone trying to diet by eating more cake.
It's like giving a drowning man a glass of water and saying, 'There mate, that should quench your thirst!'
Minneapolis has a better answer. And it’s a good consolation because being a Vikings fan is like lending someone a lot of money and you know that you'll never get paid back. Sorry, but you know it’s true!
Before we get into specifics, it’s worth noting that as of the last inflation data release, Minneapolis was the first major metro to hit below the 2% inflation threshold.
Minneapolis: Solving Inflation Since 2018
As the rest of the nation drowns in inflationary pressures as they collectively reach for a glass of water, Minneapolis appears to have found its flotation device: affordable housing.
At the heart of this strategy? The elimination of single-family zoning. "It's like we've thrown the Monopoly board in the air and let the pieces fall where they may," said city planner Greg Robertson. And where they've fallen is into a diverse landscape of duplexes, triplexes, and apartment buildings.
Since eliminating strict zoning rules in 2018 and investing $320 million in rental assistance and subsidies, Minneapolis has added much-needed housing supply to catch up with demand.
The result? Much lower shelter inflation (about half the national average) because people can access more affordable and readily available housing.
Rent growth has also been moderate over the years, sitting at about 1%, whereas the national average has been 31%.
Despite that slow rent growth, builders are still building.
“I can’t tell you how many people were like, ‘Oh, look at all this supply, look at all these just brand new buildings,’ and kind of scoffing at it like this was going to lead to gentrification or rents skyrocketing…The exact opposite has happened.”
Funny how that works right? Sometimes, we feel like economics is like the Swedish language; we’re told it makes sense, but we have our doubts.
But, this equation is a perfect example of how if you fix our supply side issues (TLDR: BUILD MORE!), then we will get more affordability and accessibility on the demand side.
Who knew the key to taming the inflationary storm was as simple as a roof over one's head? Where residents in states like California and New York fight tooth and nail to oppose new housing development, Minneapolis is leading the YIMBY (yes, in my backyard) charge.
The private sector is intimately involved in adding more housing supply to curb inflation. One great example of this is the Itasca Project. It brings together businesses, philanthropists, and public sectors in our region, all working together towards a common goal.
Their aim is to ensure that we have at least 18,000 new housing units each year until 2030. This initiative truly showcases the power of the private and public sectors working together to tackle inflation.
Also, it's not all bricks and mortar. Minneapolis has embraced renting as a way of life, recognizing the flexibility and freedom it can offer residents. "Renting isn't a dirty word here," notes local realtor, Linda Feinstein. "In fact, it's become our superpower."
Of course, the Minneapolis model isn't without its critics. Some argue that the city is merely kicking the inflation can down the road. But as resident Mark Thompson puts it, "If affordable living today means a potential issue tomorrow, well, I'll take today."
Indeed, people are happy in the city. According to Bloomberg’s Misery Index, Minneapolis has one of the lowest unhappiness rates of any major metro.
The true test, of course, will be time. Can other cities emulate Minneapolis's success? Only time will tell. But for now, as the rest of the country looks for ways to keep inflation at bay, all eyes are on Minneapolis—the city that's showing everyone else how it's done.
So What? Eliminate single-family zoning and offer incentives both on the consumer and construction side. More supply equals more affordability, which ultimately will help tame inflationary pressures which are primarily now made up of shelter costs.